McPadden v. Sidhu, C.A. No. 3310-CC (Del. Ch. Aug. 29, 2008)

August 29, 2008

This derivative action involved the sale of a subsidiary of a parent corporation whose directors

delegated responsibility of the sale to a vice-president of the subsidiary. At the time of the delegation, at least some of the directors were aware that the vice-president charged with conducting the sale was interested in purchasing the subsidiary. After purchasing the subsidiary from the parent corporation, the vice-president and his affiliates resold it for more than eight times the purchase amount. On motions to dismiss under Rule 12(b)(6) and 23.1, the court first applied the familiar rule that demand is excused if it would be futile, such as where plaintiffs plead with particularity that the decision under attack was not the product of valid business judgment. The court found that the directors’ actions of: (1) delegating responsibility of the sale to the vice-president who was interested in purchasing the company, (2) failing to oversee the vice-president’s diligence in conducting the sale, (3) disregarding the vice-president’s failure to solicit bids from the subsidiary’s competitors, and (4) relying on a fairness opinion based upon numbers prepared by management under the direction of the vice-president amounted to a showing of gross negligence sufficient to rebut the business judgment rule under the second prong of Aronson. The court stated that the “current understanding of gross negligence is conduct that constitutes reckless indifference or actions that are without the bounds of reason.” These actions, the court found, “fit[] precisely within this revised understanding of gross negligence.” The corporation’s certificate of incorporation, however, contained a limitation of liability provision pursuant to Section 102(b)(7). As a consequence, the court dismissed the case against the directors. In so ruling, the court rejected the argument that the same conduct amounted to bad faith, under which the claim might survive notwithstanding the 102(b)(7) provision.